A long-run risks explanation of predictability puzzles in bond and currency markets
Published
Journal Article
We show that bond risk premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with timevarying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets. © 2012 The Author.
Full Text
Duke Authors
Cited Authors
- Bansal, R; Shaliastovich, I
Published Date
- January 1, 2013
Published In
Volume / Issue
- 26 / 1
Start / End Page
- 1 - 33
Electronic International Standard Serial Number (EISSN)
- 1465-7368
International Standard Serial Number (ISSN)
- 0893-9454
Digital Object Identifier (DOI)
- 10.1093/rfs/hhs108
Citation Source
- Scopus